Antitrust Policy and Government Regulation
Antitrust Policy and Government Regulation
David Hemenway,
Questions:
1. "...restriction of each merchant to one pattern manufacturer."
2. "Only five companies ever bought in sufficient quantity to obtain the $1.35 per case."
3. "A toehold acquisition of a small company."
4. "Conscious parallelism that has not yet read conspiracy out of the antitrust laws."
5. "Select one . . . as its `dancing partner' and would assume responsibility for purchasing its distress supply."
6. "The law does not make mere size an offense."
7. "Leaves entirely out of account all other kinds of containers: plastic, paper, foil." (dissent)
8. "Fictitious shipment became known as `phantom freight'."
9. "Reasonable probability that either one of the companies would have entered the market ..."
Answers:
a.
b. FTC v. Cement Institute, 333
c. FTC v. The Bendix Corp., Docket No. 8739 (1970)
d. Theatre Enterprises, Inc. v.
e. Standard Fashion v. Magrane‑Houston Co., 258 US 346 (1922)
f.
g.
h. FTC v. Morton Salt, 334
i.
Answers: 1. e; 2. h; 3. c; 4. d; 5. f; 6. a; 7. g; 8. b; 9. i
MERGERS and THE HERFINDAHL INDEX
Paul Azrack,
The "Writing Across the Curriculum" movement has often emphasized the importance of short written assignments as a way to foster learning and critical thinking. The following assignment is one which allows students of microeconomics to think critically and apply economic theory to real world events.
Since recent years have seen a wave of merger activity, students are asked to evaluate the impact of a prospective merger on the level of concentration and competition in a given industry. I choose the industry and give the students several pieces of factual information about the current level of competition. These facts include the number of firms, the market shares of the leading firms, the current Herfindahl index for the industry and the 1982 merger guidelines established by the Justice Department. Students are then presented with a hypothetical merger proposal and asked to advise the Justice Department on whether or not to challenge the merger.
Their report is to be brief, approximately 200 words (the length of this manuscript), and must present all evidence to support their position. An industry that faces foreign competition, such as laptop computers, beer or athletic footwear, adds another dimension to their analysis. The choice of industry can make this assignment fun as well as educational.
Herbert M. Bernstein,
In a discussion of different modes of competition, it is argued that ideally the market should provide the greatest output at the lowest per unit price. However, pure competition may not accomplish this ideal if we incorporate into the model a costly high technology that only a few competitors can afford. Therefore, as the following graph indicates, it is conceivable that situation (b) representing a few oligopolistic firms can produce a higher output and lower per unit price than purely competitive situations (a) since the oligopolistic firms would have markedly lower marginal costs of production.
Figure 27‑1
Does Free Trade Reduce the Need for Antitrust?
Ralph T. Byrns
George Stigler and Lester Thurow, among others, have independently concluded that free international trade is a powerful threat to monopoly power, and that the most effective antitrust policy may be elimination of nearly all trade barriers. Competition from foreigners, according to this view, has eroded most of the monopoly power once possessed in such previously oligopolistic industries as document copying (Xerox), automobiles (once dominated by GM), sewing machines (once dominated by Singer), typewriters, ad infinitum.
Irvin B. Tucker,
The objective of this case is to provide a zesty story to provoke thought on two important issues. First, the economic reasons for or against government involvement in the marketplace. The parable supports the principle that in the absence of real and significant externalities, imperfect competition, or imperfect information, markets work quite well for private goods. Second, government intervention in domestic markets may produce indirect effects on the availability and price for products because of the impact of international trade. Finally, there is a similar story by Henry G. Manne, "The Parable of the Parking Lots", in The Public Interest.
In a land not far away, there was an advanced society dominated by service industries. It seems that most folks were spending much of their time writing something down on paper. One popular method for accomplishing this task was a thin piece of wood about 6 inches or so long with lead through the middle and a piece of rubber attached at one end. The opposite end from the rubber would be sharpened to an extremely sharp point for creating visible impressions on the page. These objects were called "pencils." As we begin our story, pencils were abundantly available for 1 mertil (a mertil equals a dime).
One day, all across the land, newspapers carried a column in the front page relating the tragedy which befell poor John Nerd. It seemed that Mr. Nerd had stuck himself with the sharp point of the pencil and had choked on a rubber eraser all in the same day. His condition was stable and improving. Moreover, the article pointed out that only one month before this accident, a Superb University (equivalent to our Harvard) study had been published identifying that pencil‑ chewers and those who stir their coffee with a pencil as "at risk" groups.
Television and radio interviewers rushed immediately to the hospital for coverage of the story. In the days which followed several national network talk shows featured guests who were pencil industry spokespersons, doctors, lawyers, consumer advocates, economists, journalists, congressmen, and many others to discuss the "pencil problem." Political pressures began to mount to do something before another Nerd was injured. The congress appointed a study group recruited from all special interest groups in the country to look into the matter. After many long hours of debate, this committee recommended that the public be educated to replace pencil usage with the personal computer. The Association of Professional Pencil‑Makers charged that this would be unfair competition and restraint of trade. Emotions of pencil executives ran high and a slush fund was collected for some mysterious purpose. After many months of deliberation, the congress passed a bill by a senator from a state without any pencil manufacturing impact. In order to protect the public, this bill required that each pencil have the statement "This Pencil Could Be Hazardous to Your Health" printed on its side. There was also concern that the income of pencil‑makers was too low, so a price support program for pencils was passed. Some senators expressed reservations about the support program for pencils. They said the result of an earlier support program for cheese was government warehouses full of cheese. These senators feared the country might again be forced to distribute pencils to needy, as happened for cheese.
Reaction from pencil‑markers was swift. First, pencil industry management got the largest pay raise in history. Second, each manufacturer launched an advertising campaign across the nation attempting to persuade the public that its brand of pencil was the safest. Eventually, many pencil manufacturers began making their product without paint, without erasers, and with only soft lead that would not hold a sharp point. Soon the quality of domestic pencils was considered by many consumers to be inferior to foreign pencils, and domestic pencils cost four times more than imported pencils. Imports began to increase and workers lost their jobs. Pencil industry officials and unions reacted by demanding protection from the congress, while consumers were urged to reject the foreign‑made pencils. Across the land, demonstrations were held against foreign pencils and senators from states where pencil companies were located declared that pencils were as patriotic as Rollerball (as American as baseball). Some senators proposed a bailout (named after a major car manufacturer) while a very few congressmen suggested nationalizing the pencil industry. Eventually, such ideas were rejected because they increased the deficit, and because it was trendy to pass protectionist measures. Instead, a bill was passed and signed by the president to impose quotas on pencil imports. The president then called a press conference to inform the public that this was only a temporary step needed to give the industry time to improve and become competitive in world markets.
The impact of this legislation was swift. The decline in pencil industry employment stabilized and fewer customers found foreign pencils on the shelves. Alas, the only problem then was that pencils had a 10 mertil instead of the old 1 mertil, price tag, and they didn't work as well as they used to. Some said they would have preferred to spend the extra 9 mertils on something besides pencils.
Ralph T. Byrns
Determination of allowable costs is one of the problems regulators must face when regulating monopoly power. Use this concept as a basis for discussing the current problem in the airline industry. Did regulation prior to 1980 allow some factor payments to exceed opportunity costs? (Senior airline pilots' salaries commonly exceeded $100,000 annually.) Should there be limits on the level of wages and/or executive salaries that are considered justifiable costs?
Monopolies and Consumer Surplus
Thomas J. Shea,
The use of quantity discounts is the most obvious one always used to show how a firm squeezes out consumer surplus. However, to show the students how a regulated monopoly can squeeze out consumer surplus nothing works better than to ask the students to ask their parents to mail them the receipt from their latest electric bill. Not only does this get them to write home and let their parents know they are doing some work at college but one look at the various rates per kilowatt hour leaves no doubt in their mind about differential pricing.
Ralph T. Byrns
The thrust of antitrust policy is to breakup firms that are monopolies. Show why economies of scale may indicate that one large firm may be able to supply a given good at a lower price and in larger quantities than could be provided by a competitive industry. In this case antitrust would not be in the consumer's interest.
Consider a two firm industry versus a one firm industry. The required output is Q. Assume that in the two firm industry, each firm produces Q/2, so that the production function for each firm would be Q/2 = f( K/2, L/2). Total output for the industry would be Q. Total resource use would be K,L. Assume the one firm industry operates with economies of scale. If the one firm uses the same resources its production would be f(K,L), and would produce an output greater than Q. The students should see that the same output could be produced with fewer resources or that the same resources could produce more output. Breaking up the one firm into several smaller scale units would not necessarily benefit the consumer. Regulation may be socially preferred on the grounds of efficiency.
Regulation vs. "Cut‑Throat" Competition?
Ralph T. Byrns
Our competitive models predict that in the long run profits will be zero and all capital owners will receive only normal rates of return. One aim of regulation is to adjust revenues so that capital owners make an average or normal rate of return. Discuss why in a dynamic, uncertain economy some capital owners may prefer ownership of a firm in a regulated industry to ownership of a firm in a competitive industry.
Does Safety Equipment Enhance Safety?
Ralph T. Byrns
Sam Peltzman's studies of auto safety equipment suggest that greater safety for the drivers and passengers in an automobile reduce the personal costs of reckless driving and cause increased automotive carnage to such third parties as passengers in other vehicles or pedestrians. Although the empirical work is far from conclusive, compulsory safety equipment appears not to have reduced injuries and fatalities to the occupants of vehicles and may have increased pedestrian fatalities. Gordon Tullock has (facetiously?) suggested that these negative externalities from compulsory personal automobile safety equipment might be internalized if spears were mounted in steering wheels to impale drivers involved in front end collisions. We have found that this general line of argument invariably elicits a lively debate in our classes.
Ralph T. Byrns
Discuss several instances in which regulation seems silly or unnecessarily costly. For example, OSHA repealed a rule in 1980 that required all firms employing more than four males to have `split' (horse‑shoe style) toilet seats. An EPA order required a utility to shut down one of its polluting electric generators. The alternative plant designed under the guidance of the EPA was more costly per KWH generated, and produced more pollution. The utility's request to convert back to the first plant was denied. Ask students for other examples of this genre.
Eric K. Steger,
I explain that block pricing is a technique that can efficiently generate revenues to cover all costs for a natural monopolist. This technique essentially uses price discrimination to yield efficiency.
After a presentation on the benefits of block pricing I ask, "Are there any costs of block pricing?" Typically, I get few answers. I then explain that if energy conservation is a goal, block pricing is analogous to your automobile insurance rates declining when you receive more traffic tickets. That is, there is a perverse incentive to economize on energy use when block pricing exists.
Notes: